1. Field of the Invention
The present invention generally relates to a personal financial management system. In particular, the present invention relates to method and system for determining the state of an individuals finances, establishing a personal financial code and projecting the effect of fiscal decisions and behaviors.
2. Description of Prior Art
Business uses profit as a quantified unit of measure. With this quantified unit of measure, business financial management system may determine the state of the company as it has performed over the previous time period and/or project how the business will perform over future time periods. For example, a business may provide monthly, quarterly, and/or annual reports. Further, the business may predict monthly, quarterly, or annual profits for one or more future periods.
Profit may be used in fundamental analysis to aid in determining the value of a company. For example, a stock purchaser may use profit to price ratios in a decision to purchase stock. In addition, a stock purchaser may use projected profits in the decision. In another example, a real estate investor may use a multiple of profit in determining a value of a rental property.
Projected profits may also be used in making decisions. For example, a company may weigh the decision of buying new equipment, which would reduce the cost of a product. In weighing the decision, the company may use projected profits over one or more periods.
As such, business has a universal measure of fiscal state—profit. With this universal measure, business developed elaborate management systems. Business models, accounting systems, reports, and financial statements are all built on the universal business measure—profit. Further, profit is a quantified unit of measure. With a unit of measure, it is possible to link one activity of a business with every other activity of a business. As such, businesses may determine the consequence of fiscal decisions.
Accounting and budgetary principles are typically used in determining the state of a business. Many typical personal accounting systems have attempted to apply these principles to individuals. However, personal financial measures differ from business measures in various manners. For example, individuals may not measure a financial state in terms of profit. Further, individuals have a limited lifetime and thus a lifetime-limited pool of funds.
Many typical budgetary systems for individuals attempt to apply business measures to individuals. However, the individual is not a business. Individuals do not have a profit motive. Individuals are motivated by lifestyle and projected financial goals, or a vision of financial well being. Consequently, management systems constructed by business around the profit measure do not work for the individual.
Many typical systems substitute return on investment for profit. However, return on investment is the performance of an asset and profit is income minus expenses. Moreover, return on investment only applies to assets and, as such, is only one aspect of personal finance. Therefore, return on investment is a poor unit of measure. Further, profit is a business formula that does not apply to the individual.
Many financial concepts such as risk management; debt management, tax management, savings, asset allocation, and financial plans are of little management value without a personal financial measure. For example, savings for business is a reduction in costs or expenses that may result in increased profit. A car rental company might buy rental cars cheaper from one manufacturer than another. The resulting saving may increase profits. However, an individual might purchase a less expensive new car from one manufacturer rather than another. The individual may have a larger checkbook balance. However, an increase in checkbook balance is not savings for an individual.
Actually, savings for the individual is an increased in an income producing asset or a reduction in liability. For example, purchasing stock may be an increase in a income producing assets. This is savings. The possible return on that investment next year and the years following may further increase the value of the individuals income producing assets. This is also savings. In further contrast with the business model, savings for the individual had a cost. The cost may have been in immediate lifestyle purchases, payment of other expenses, or other fiscal events. Further, this cost effects other fiscal decisions.
Debt is another example of business principles and practices incorrectly applied to the individual. The use of debt by business has a clear understandable effect on the profit measure. A business may use debt to purchase a machine to produce a product to generate a profit. In theory, a business borrows money to increase profits.
Individuals generally do not borrow money to make more money. Rather, individuals borrow money to consume or purchase income-consuming assets. Using debt to purchase a machine may directly affect the profit of the company. However, the use of debt by an individual does not have a clear and understandable effect on the individual's financial well-being. The accumulation of debt is often a disaster for individuals or families.
Another difference between business financial principles and those of personal finance is the difference in lifetime. Businesses may operate indefinitely. Principles established to manage fiscal policy are created for the infinite time period. Individuals have a limited lifetime and a limited pool of income from which to draw.
Various budgetary software programs exist. However, these programs do not provide a measure of personal financial well-being. Further, these programs fail to project the effect of budgetary discrepancies.
As such, many personal budgetary management systems suffer from deficiencies in providing a measurement of personal finances, establishing a personal financial code, and projecting the effect of fiscal decisions and behaviors. Many other problems and disadvantages of the prior art will become apparent to one skilled in the art after comparing such prior art with the present invention as described herein.